On the last day of the last term the Court split 5-4 in a controversial and contentious Janus decision with a dissent read from the bench. The dissent argued, in large part, that States should be free to permit public-sector unions to continue to assess employees who do not join the union agency fees, even if some of these employees object to associating with the unions’ political objectives and strategies, in order to overcome the free-rider problem where nonmembers enjoy the collective bargaining benefits achieved without paying for them. The majority held that overcoming the free-rider problem was insufficient grounds for perpetuating an intrusion into First Amendment rights. Both sides overlooked a far larger free-rider problem. Public-sector labor unions are a well-defined and cohesive coalition that is organized to divert more taxpayer resources to their coalition. Due to the free-rider problem, taxpayers have difficulty organizing a strong defense against this coalition. This Article discusses some economic principles, some differences between historical labor unions in the private sector and modern public-sector labor unions, and the Janus decision.

In 1988 the U.S. Supreme Court approved the fraud on the market theory for securities trading in an efficient market thus enabling securities class action plaintiffs to establish their required reliance element of the case through a rebuttable presumption. _Basic v. Levinson_ held that efficient markets incorporate publicly disseminated information and investors who purchased or sold securities in an efficient market therefore relied on any publicly disseminated misinformation. For more than a quarter century since Basic, the efficient market theory has sustained a barrage of assaults from commentators who object to the use of economic theory in legal decisionmaking and who have drawn unsubstantiated inferences from pieces of economic literature taken out of context. In the recently decided case of _Halliburton v. John_, the Court affirmed its commitment to efficient market theory; however, Justices Alito Scalia, and Thomas reject the efficient market theory in reliance on legal scholars who have misstated the consensus of economists. This Article examines the misplaced hostility to efficient market theory.

Using a substantially larger sample than has been used before, and a sample that includes the Great Financial Crisis and its ensuing recession, I investigate the stock market reaction to securities class action filings following the enactment of the Private Securities Litigation Reform Act through the first quarter of 2012. I find that, on average, even after adjusting for market downturns, there is a statistically significant negative abnormal return at the time of filing. There is also a statistically significant negative abnormal return during the weeks preceding the filing indicating that the market partially, but not fully, anticipates these filings. Additionally I find the following: filings that include a § 10(b) claim have a more adverse impact than those that do not; filings that are subsequently dismissed have a smaller adverse impact than those that are not, indicating that the market has some ability to distinguish between claims with different degrees of merit; filings in the Ninth Circuit have a more adverse impact than others, especially when compared with the Second Circuit; and finally, filings against nonservice sector firms have a more adverse impact than those against service sector firms, and financial firms in the service sector suffer more when claims are filed than non-financial service firms.

The Affordable Care Act seeks to remedy the problem of information asymmetry in the health insurance market by mandating that everyone obtain health insurance or pay a penalty, and by requiring the States to expand Medicaid or lose existing federal funds. In NFIB v. Sebelius, Chief Justice Roberts held that Congress' power to regulate under the Commerce Clause could not justify the Individual Mandate to purchase insurance, but that the penalty could be construed as a tax and upheld under the taxing power. Chief Justice Roberts also held the Medicaid Expansion to be an unconstitutional use of spending power, but determined that the Medicaid Expansion could remain with the States having the option to keep existing funding and not expand or expand and take the incremental funding. Eight Justices disagreed with the Chief Justice on the Individual Mandate, and six Justices disagreed with the Chief Justice on the Medicaid Expansion. This creates a paradox in that a supermajority of the Court believes the case was wrongly decided on both main questions. More distressing is the scant analysis given in all of the opinions to the constitutional constraints on taxes.

The Stable Rehnquist Court Era (SRCE) covers the period from the appointment of Justice Breyer to the passing of Chief Justice Rehnquist. There has been only one longer period of stability in the Court’s history, and that was in the early nineteenth century when far fewer cases were decided. Thus the SRCE presents a unique opportunity with a large number of observations to conduct statistical analysis of the Justices’ votes while the composition of the Court is held constant. I present a statistical empirical analysis of voting for this period both for the potentially interesting results that can be learned, and as an example of how to conduct and present an empirical study which is objective and replicable. Some of the findings include: the fact that only a few pairs of Justices have statistically significant differences in voting records; the magnitude of the departure from independent voting is enormous in statistical terms; Justice Thomas is the most predictable Justice, and Justice Scalia is the least-changed Justice. Of particular interest is a finding that is contrary to conventional wisdom. Conventional wisdom suggests that the median Justice closest to the center, presumably Justice Kennedy, is the most influential Justice. However, I develop a measure of influence which employs the statistically significant effects the Justices have on each other and suggests that the most influential Justices on the Court were Rehnquist, Souter, and Breyer.

We examine the role played by the parent’s motive in undertaking a carve-out; parent’s post-IPO influence over the carved-out subsidiary; and anti-takeover provisions and industry structure of a carve-out on its acquisition likelihood and its acquisition premium. We find that the probability and hazard of a carve-out acquisition increases when the parent’s objective is to unlock the value of a subsidiary and when the parent and the subsidiary are tied with a product-market relationship. We also find that the post-IPO parent ownership significantly affects the likelihood and level of acquisition premium. Additional analyses examining the post-IPO carve-out status suggest that the impact of a product-market relationship and post-IPO parent ownership increase the probability of re-acquisition.

Financial markets do not function well when fraud is pervasive. It has been well documented that financial fraud has increased following changes in securities law that occurred in the 1990’s. Also around September of 2009, the investigations into the SEC examinations of Bernard Madoff Investment Securities, LLC were completed and released to the public. The simple facts reveal an alarming level of incompetence and lack of financial literacy on the part of the guardians of the integrity of our financial markets. I suggest two important tools for addressing these problems. One is to supplement enforcement of anti-fraud rules with more private attorney generals by expressly creating a private right of action for aiding and abetting violations of securities laws. This will foster a stronger culture of integrity and ethical conduct in the auditing profession. An additional tool is to increase financial literacy in our law schools which supply the regulators of our markets.

In 2008 the Supreme Court ruled in a 5 to 3 decision that participants to a sham transaction in the product market designed to fraudulently inflate revenue could not be liable in a private action to recover under Section 10(b) of the Securities and Exchange Act because the participants had not communicated directly with the shareholders and therefore the public could not have relied on the misrepresentations. Early commentary has been critical of the majority’s legal reasoning. I bring additional economic theory to the criticism of the majority in light of the subsequent financial sector and macroeconomic collapse and the recently discovered fifty billion dollar Ponzi scheme by Bernard Madoff. The Court’s ruling has created a new moral hazard where corporations are given pecuniary encouragement to engage in unethical behavior. The President and Congress should act now to remedy the majority’s ruling.

Financial markets do not function well when fraud is pervasive. Around September of 2009, the investigations into the SEC examinations of Bernard Madoff Investment Securities, LLC were completed and released to the public. The simple facts reveal an alarming level of incompetence and lack of financial literacy on the part of the guardians of the integrity of our financial markets. I suggest two important tools for addressing these problems. One is to supplement enforcement of anti-fraud rules with more private attorney generals by expressly creating a private right of action for aiding and abetting violations of securities laws. This will foster a stronger culture of integrity and ethical conduct in the auditing profession. An additional tool is to increase financial literacy in our law schools which supply the regulators of our markets.

In this paper I explain that law professors who claim to have proven that the stock market cannot be efficient have based their case on economic models contain hidden assumptions which are nonsense. Specifically, the assumption that investors have no wealth constraint and can borrow unlimited amounts of capital is nonsense. I further explain that the frequently touted claim that many investors are irrational is not relevant to the debate about market efficiency because when real world characteristics of financial markets are imposed - markets clear, budget constraints are satisfied, and investors face credit limits - markets will be efficient regardless of the mental capacity of investors.

Dead hand poison pills prevent potential hostile acquirers from circumventing a poison pill with a proxy contest whereby newly elected directors could redeem the pill. Dead hand provisions only permit continuing directors to redeem. Shareholder rights advocates and legal scholars have criticized dead hand poison pills as an assault on shareholder governance, but economic theory suggests potential shareholder benefits. We provide the first empirical study of dead hand poison pills. We find that adoption of dead hand poison pills leads to gains for shareholders and losses for bondholders. This supports Schwert's (2000) conjecture that poison pills provide shareholders with better premiums rather than entrench ineffective managers.

Bhagat and Romano (2002a, 2002b) document the importance of event study analysis of equity returns in corporate governance. We extend their analysis with the argument that analysis of bond returns around important corporate events can provide additional important information. Such information is particularly important in the current active public discussions over corporate governance. We provide an example of event study analysis of bond returns examining the impact of large dividend changes on both stockholders and bondholders in an effort to differentiate between the information content (transparency) and possible wealth transfers (theft) around dividends. Our study replicates earlier studies on investment grade bonds with ambiguous results using a sample of noninvestment grade bonds. Our results suggest that for ordinary dividend changes, wealth expropriation is a significant explanation in the gain to stockholders.

The question as to whether hostility is economically wasteful has been subject to intense debate for decades in the literature of law, economics, and finance. Typically the debate is focused in the issue of managerial entrenchment. Commentators frequently adopt an unstated presumption that hostility is wasteful per se. We argue that it is important to examine empirical data before accepting this premise. We investigate long-term, post-acquisition measures of corporate operating performance of hostile acquisitions relative to non-hostile acquisitions. Our results suggest that hostility does not affect operating performance, and from this we infer that there are no economic costs associated with hostility. The findings are robust with respect to a variety of methodologies and control variables.

We investigate whether measures of intangible capital based on advertising and R&D can explain variation in Tobin's Q ratio for the pharmaceutical and chemical industry. The study is motivated by prior literature studying this relation in other industries, recent literature investigating intangible capital in this industry, and the larger controversy about whether stock valuations have been high due to irrational investors or large investment in intangible capital. We find that our measures of intangible capital are statistically significant determinants of Q and explain 20% of the variation in our sample. When age and industry are incorporated into the model our explanatory power reaches 25%.

We use data on Nasdaq stocks to study arguments that preferencing reduces incentives to quote competitively. We examine a market maker’s volume as a function of various measures of quoting aggressiveness. We find that more aggressive quoting does indeed result in more business. We also examine the relation between volume and quote aggressiveness as a function of the competitiveness. We find that in less (more) competitive markets, increased quote aggressiveness has a smaller (larger) impact on market share. We argue that preferencing arrangements could be more harmful to public investors in markets where competition is weak.